Price Elasticity of Demand
Marketers also require knowing price elasticity-how responsive demand shall be to a change in price. Consider the two demand curves in given Figure. In the given Figure, a price increase from P1 to P2 leads to a relatively small drop in demand from Q1 to Q2. In given Figure b, though, the same price raises leads to a large drop in requirement from Q′1 to Q′2. If requirement hardly changes with a small change in price, we can say the demand is inelastic. If demand changes highly, we say the demand is elastic. The price elasticity of demand is given by below described formula
Price Elasticity of demand = % change in Quantity demand/ % change in Price
Imagine demand falls by 10 % when a seller increases its price by 2 %. Price elasticity of demand is then -5 (the minus sign ensures the inverse relation among price and demand) and demand is elastic. If demand falls by 2 % with a 2 % rise in cost, then elasticity is -1. In this case, the seller's total profits stay the similar: The seller sells fewer items but at a higher price that preserves the same whole profits. If requirement falls by 1 percent when price is increased by 2 percent, then elasticity is -½ and requirement is inelastic. The less elastic the requirement, the more it pays for the seller to increase the price.
What determines the price elasticity of requirement? Buyers are not as much of price sensitive when the product they are buying is unique or when it is high in quality, reputation, or elegance. They are too less price sensitive when substitute products are difficult to find or when they cannot simply compare the quality of substitutes. After all, buyers are fewer prices sensitive while the entire expenses for a product is low relative to their income or when the cost is shared by another party.
If requirement is elastic rather than inelastic, sellers will think about lowering their price. A lower price will produce more whole revenue. This preparation makes sense as long as the extra costs of producing and selling more do not exceed the additional revenue. At the similar time, most firms want to stay away from pricing that turns their products into commodities. In latest years, services such because deregulation and the instant price comparisons afforded by the Internet and other technologies have enlarged customer price sensitivity, turning products ranging from telephones plus computers to fresh automobiles into commodities in consumers' eyes. Marketers require to effort harder than ever to differentiate their offerings while a dozen competitors are selling virtually the similar product at a similar or lower price. More than ever, companies need to realize the price understanding of their customers and prospects and the trade-offs people are willing to make among price and product quality.